Fitch Maintains Ratings of Aetna on Rating Watch Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has maintained the ratings of Aetna Inc. (Aetna) on Rating Watch Negative following a periodic review of the company's operating performance and financial profile. The ratings were placed on Rating Watch on July 7, 2015, following the company's announcement that it had reached an agreement to acquire Humana Inc. (Humana) in a cash and stock transaction valued at approximately $37 billion. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The Rating Watch Negative status of Aetna's ratings reflects expected significant deterioration in the company's financial leverage metrics following the pending close of its acquisition of Humana, as well as potential operational and/or earnings disruptions that could arise as these two very large and complex organizations are integrated. Assuming the acquisition and its financing are completed as currently envisioned, upon close of the acquisition, Fitch expects to downgrade Aetna's ratings by one notch.

At close of the acquisition, Fitch expects Aetna's financial leverage to be approximately 46%, and debt to EBITDA to be in excess of 3.0x due to the debt being issued to fund the cash portion of the purchase price. Fitch does not anticipate that Aetna's financial leverage metrics will return to a level considered appropriate for its current rating category within a 12 to 24 month time horizon normally associated with a Rating Outlook. Given Aetna's size and business profile, these metrics at its current rating would be a run-rate debt to EBITDA ratio approximating 1.8x and financial leverage of 30%-35%.

The ratings of Humana have also historically reflected Fitch's view that Medicare Advantage (MA) enrollment generally supports lower ratings relative to employer group and individual enrollment due to the U.S. government's large role in the MA market and the suppressive effect this role has in terms of margins and capital formation. As a large portion of Humana's revenue is associated with MA business, Aetna's exposure to this business will increase significantly at close of the transaction.

Aetna's ratings reflect the organization's major market position and significant size and scale, strong historical profitability and interest coverage, and generally solid balance sheet characteristics. Fitch views the combination of Aetna and Humana as strategically beneficial to both organizations in terms of the application of Aetna's strong performance in commercial risk business to Humana's commercial business, geographic and business diversification, particularly with regard to Humana, as well as stronger provider networks and pharmacy benefit management capabilities.

Fitch's ratings on Aetna also continue to reflect the risks derived from government involvement in health insurance and managed care companies' ongoing business activities. Fitch's long-held concern is that government efforts to advance public policy goals could further adversely affect health insurance and managed care companies' ability to manage their business and hinder their ability to generate cash flow supporting debt obligations.

RATING SENSITIVITIES

At the close of the transaction, Fitch expects to downgrade the ratings of Aetna by one notch, at which time Fitch will establish new rating triggers associated with the combined company's new ratings.

FULL LIST OF RATING ACTIONS

The following ratings remain on Rating Watch Negative:

Aetna Inc.

--$250 million of 1.75% senior unsecured notes due May 15, 2017 'A-';

--$500 million of 1.5% senior unsecured notes due Nov. 15, 2017 'A-';

--$383 million of 5.95% senior unsecured notes due March 15, 2017 'A-';

--$375 million of 2.2% senior unsecured notes due March 15, 2019 'A-';

--$750 million of 3.95% senior unsecured notes due Sept. 1, 2020 'A-';

--$500 million of 4.125% senior unsecured notes due June 1, 2021 'A-';

--$600 million of 5.450% senior unsecured notes due June 15, 2021 'A-';

--$1 billion of 2.75% senior unsecured notes due Nov. 15, 2022 'A-';

--$750 million of 3.50% senior unsecured notes due Nov. 15, 2024 'A-';

--$771 million of 6.625% senior unsecured notes due June 15, 2036 'A-';

--$534 million of 6.75% senior unsecured notes due Dec. 15, 2037 'A-';

--$500 million of 4.5% senior unsecured notes due May 15, 2042 'A-';

--$500 million of 4.125% senior unsecured notes due Nov. 15, 2042 'A-';

--$375 million of 4.75% senior unsecured notes due March 15, 2044 'A-';

--Short-term IDR 'F1';

--commercial paper 'F1'.

Aetna Inc.

--Long-term IDR 'A'.

Aetna Life Insurance Company

Aetna Health Inc. (a Pennsylvania Corporation)

Aetna Health Inc. (a Florida Corporation)

Aetna Health Inc. (a New Jersey Corporation)

Aetna Health Inc. (a Texas Corporation)

Aetna Health Inc. (a New York Corporation)

Aetna Health of California Inc.

--IFS 'AA-'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996574

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20151211005618/en/

Fitch Ratings
Primary Analyst
Bradley S. Ellis, CFA
Director
+1-312-368-2089
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Mark E. Rouck, CPA, CFA
Senior Director
+1-312-368-2085
or
Committee Chairperson
James B. Auden, CFA
Managing Director
+1-312-368-3146
or
Media Relations
Hannah James, +1-646-582-4947
[email protected]

Source: Fitch Ratings

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